Does Yokogawa Electric (TSE:6841) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Yokogawa Electric Corporation (TSE:6841) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yokogawa Electric

What Is Yokogawa Electric's Debt?

The chart below, which you can click on for greater detail, shows that Yokogawa Electric had JP¥24.1b in debt in September 2024; about the same as the year before. However, it does have JP¥151.7b in cash offsetting this, leading to net cash of JP¥127.6b.

How Healthy Is Yokogawa Electric's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Yokogawa Electric had liabilities of JP¥164.9b due within 12 months and liabilities of JP¥42.7b due beyond that. On the other hand, it had cash of JP¥151.7b and JP¥215.9b worth of receivables due within a year. So it actually has JP¥160.0b more liquid assets than total liabilities.

It's good to see that Yokogawa Electric has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Yokogawa Electric has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Yokogawa Electric has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yokogawa Electric can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Yokogawa Electric has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Yokogawa Electric produced sturdy free cash flow equating to 59% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Yokogawa Electric has net cash of JP¥127.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So is Yokogawa Electric's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Yokogawa Electric, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.